China Automotive Systems, Inc.
Q4 2015 Earnings Call Transcript

Published: 11 Aug 2016

[Operator:]

Greetings and welcome to the China Automotive Systems Second Quarter 2016 Results. Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Dixon Chen. Thank you. You may begin.

[Dixon Chen:]

Thank you, Jessie. Thank you everyone for joining us today. Welcome to China Automotive Systems second quarter 2016 earnings conference call. Joining us today are Mr. Qizhou Wu, Chief Executive Officer; Mr. Jie Li, Chief Financial Officer and Ms. Levine Rachel, Financial Manager and Hanlin Chen, Chairman of China Automotive Systems. They will be available to answer questions later in the conference call with the assistance of translation. Before we begin, I would remind all listeners that throughout this call, we may make statements that may contain forward-looking statements. Forward-looking statements represent the Company’s estimates and assumptions only as of the date of this call. As a result, the Company’s actual results could differ materially from those contained in these forward-looking statements due to a number of factors including those described under the heading Risk Factors in the Company’s Form 10-K Annual Report for the year ended December 31, 2015 as filed with the Securities and Exchange Commission on March 30, 2016, and in other documents filed by the Company from time-to-time with the Securities and Exchange Commission. The Company expressly disclaims any duty to provide updates to any forward looking statements made in this call whether as a result of new information, future events or otherwise. On this call, I will provide a brief overview and summary of financial results for the second quarter and six months of 2016. And then I’ll turn the call over to the management to conduct a question-and-answer session. Then the following 2016 second quarter and six months results are unaudited; and these results are reported under the US GAAP. For the purpose of today’s call, I’ll review all financial results in US dollars. We will begin with a review of the recent dynamics of the automotive industry and China Automotive Systems’ market position. Our sales in the second quarter of 2016 continued to reflect slower economic growth as China’s GDP growth rate remain at 6.7% annual rate according to China National Bureau of Statistics, which was the slowest since 2009. Our sales were impacted by the economic slowdown combined with the weakness in certain segments of the Chinese auto market. Overall, vehicle sales in China grew by 10% year-on-year in the second quarter according to the China Association for Automobile Manufacturers, CAAM. Passenger vehicles sales grew by 11.8% year-on-year where there was a significant variation in different segments. The important basic passenger car segment and the crossover passenger car sales continued to decline. In June of 2016, the monthly sales of Chinese branded cars, a key market for us were down 1% year-on-year, the sales of Chinese brand cars down 15.5% year-on-year for the first six months of 2016. Also, commercial vehicle sales grew only by 1.9% in the first quarter of 2016. In the second quarter of 2016 – in the second quarter of 2016, net sales were $101 million, compared with $109.2 million in the same quarter of 2015. Net sales was $217.9 million in the first six months of 2016 ended June 30, 2016, compared with $232.6 million in the first six months of 2015. With more than 80% of sales in China, we sell our steering products in RMB and translate our financial numbers into US dollars for reporting purposes. Current volatility can cause exaggerated changes in our reporting performance. Therefore, the depreciation of Chinese RMB against the US dollars in the first quarter of 2016 caused significantly lower sales – net sales to be reported. Despite the lower reported sales, we continue to invest in our products and operations. In 2016, we invested approximately $6 million in second quarter and $12.1 million in the first quarter of 2016 in R&D. We continue to build out our steering technology especially to improve the performance of our electric power steering products EPS products, as well as introducing more EPS models to broaden the number of vehicles to begin service. The growth of the EPS products in China has been replaced – displaced in our legacy hydraulic steering products. We have been building our all EPS products over the past several years in anticipation of this trend. While sales of the EPS products in the second quarter were 27.8% of total sales and we expect that proportion will grow larger in the future as we launch additional EPS models to reach a larger number of vehicle models. Our R&D was also mainly responsible for our primary subsidiaries Hubei Henglong winning the Central Government’s China Quality Nomination Award in 2016. This is the central government’s highest reward for quality – our product quality and there were thousands of nominations and CAAS was one of only five winners from the auto and auto component manufacturing sectors. China Quality Awards was organized by the State Council and National Bureau of Quality Inspection and it takes place only every other year. In addition, for the first six months of 2016, we have invested $18.2 million in property, plant and equipment to improve our production performance and quality as well as improve our EPS operations for the future. We also believe our low cost manufacturing and high quality steering products provide an advantage to further grow into international markets. Our Brazilian São Paulo plant is letting us to support Fiat and Chinese OEMs in the Central and South American markets. Our joint venture there is also marketing our steering products other to local engines and the aftermarket in those markets. This São Paulo plant is another stepping stone in our plan to become a global supplier of steering products. Fiat Chrysler North America remain our largest customer as we supply our steering gears to both Dodge van, truck and jeeps totaling five vehicle models. All heavy duty, all the heavy duty Dodge van models 2500 through 5500 in North America use our steering gears. As we are their suited supplier of recirculating steering gears RCG steering gear in North Americas. We continue to ship our steering gears to support motor companies in North America as well. In addition, China-based joint ventures of General Motors, Volkswagen, Peugeot, Citroen, Fiat Chrysler North America remain our key customers. We have used our financial strength to initiate a stock repurchase program in the second quarter of 2016 to support our undervalued share. At the time of second quarter, at the end of the second quarter, we had cash, cash equivalents, plus cash in short-term investments of $95.8 million. Given our leadership position in our industry in China, we continue – and our continued profitability, strong financial condition and ability to supply large and global vehicle OEMs, we do not believe our share has been properly valued in the current market. As of June 30, 2016, approximately $1.5 million were used to repurchase 115,000 shares in the market. We have $4.5 million remaining in our authorized repurchase plan for future transaction to support long-term shareholder value. We continue to be a leading supplier of steering products to many OEMs in China. Our R&D is providing a new technology – new technologies and products to enhance our market position and adjust for opportunities for faster growth and additional global opportunity for future growth as become a global supplier. Let me review – now let me review the financial results for the second quarter of 2016. In the second quarter of 2016, net sales was $101 million compared to $109.2 million in the same quarter 2015. Net sales declined mainly due to the impact of foreign currency exchange translation as the value of RMB depreciated compared to the US dollar. While the company’s net sales declined by 7.5% in the second quarter RMB suffered approximately 6.5% year-over-year depreciation. Also, lower sales of domestic vehicles using China Automotive Systems legacy hydraulic power steering were partially offset by higher sales of EPS units in China. Gross profit was $18.1 million in the second quarter of 2016, compared to $21.8 million in the second quarter of 2015. The gross margin was 18% in the second quarter of 2016, versus 20% in the second quarter of 2015. 18% of - and also the gross margin was 18% in the first quarter of 2016. The gross margin decreased year-over-year was mainly due to changes in the product mix. Selling expenses were $4.1 million in the second quarter of 2016 compared with $12 million in the second quarter of 2015. Selling expenses represented 4.1% of net sales in the first quarter – in the second quarter of 2016, compared with 3.7% in the same quarter of 2015. The increase was mainly due to more marketing activities conducted during the quarter. General and administrative expenses, G&A expenses were $3.9 million in the second quarter of 2016, compared with $3.8 million in the second quarter of 2015. G&A expenses represented 3.9% of net the sales in the second quarter of 2016 compared to 3.5% in the second quarter of 2015. R&D expenses were $6.0 million in the second quarter of 2016, compared with $6.4 million in the second quarter of 2015. R&D expenses continued to focus now the development of the company’s EPS products. R&D expenses represented 5.9% of sales in the second quarter of each 2016 and 2015. Net financial income in the second quarter of 2016 were $0.1 million compared with $0.7 million in the second quarter of 2015. The decrease was mainly due to the decrease in interest income and foreign exchange gain. Income from operations was $5.3 million in the second quarter of 2016, compared to $8.3 million in the second quarter of 2015. The decrease was primarily due to the lower revenue and the gross profit combined with higher operating expenses in the second quarter of 2016, compared with the same quarter in 2015. As a percentage of net sales, the operating margin was 5.2% in the second quarter of 2016, compared to 7.6% in the second quarter of 2015. Income before income tax expenses and equity in earnings of affiliated companies was $6.5 million in the second quarter of 2016, compared with $9.2 million in the second quarter of 2015. Net income attributable to parent company's common shareholders was $5.4 million in the second quarter of 2016, compared with net income attributable to parent company's common shareholders of $7.7 million in the corresponding quarter of 2015. Diluted earnings per share were $0.17 in the second quarter of 2016, compared to diluted earnings per share of $0.24 in the second quarter of 2015. The weighted average number of diluted common shares outstanding was 32,087,634 shares in the second quarter of 2016, compared to 32,138,438 shares in the second quarter of 2015. Now let me go over the results for the first six months of 2016. Net sales were $217.9 million in the first six months of 2016, compared to $232.6 million in the first six months of 2015. Six months gross profit was $39.2 million, compared to $43.5 million in the corresponding period last year. Six-month gross margin was 18% in the 2016 first six months, compared to 18.7% in the corresponding period in 2015. Gain on other sales of $2 million was in the first six months of 2016, compared with $2.4 million in the 2015 period. Income from operations was $12.3 million in the first six months of 2016, compared to $17.6 million in the first six months of 2015. Operating margin was $5.6 million in the first six months of 2016, compared with 7.6% for the corresponding period of 2015. Net income attributable to parent company's common shareholders was $11.1 million in the first six months of 2016, compared to $16.2 million in the corresponding period in 2015. Diluted earnings per share were $0.34 in the first six months of 2016, compared with $0.50 for the corresponding period in 2015. In addition to our continuing profitability, we continue to have a strong balance sheet. Now let me quickly walk you through our balance sheet. As of June 30, 2016, total cash, cash equivalents, pledged cash and short-term investments were $95.8 million. Total accounts receivable including notes receivable were $314.1 million. Accounts payable were $221.3 million and bank and government loans were $42.2 million. Total parent company stockholders' equity was $303.6 million as of June 30, 2016, compared to $299 million as of December 31, 2015. For our business outlook, management revised the company’s revenue guidance for the full year of 2016 to $430 million due to the depreciation of the RMB. This target is based on the company's current view of operation and market conditions, which are subject to change. With that, operator, we are ready to begin the Q&A session.

[Operator:]

[Operator Instructions] We do have a question coming from the line of Robert Polivich, a private investor. Pleas proceed with your question.

[Robert Polivich:]

Yes, this is Robert Polivich. Thank you for taking my call.

[Dixon Chen:]

Thank you.

[Robert Polivich:]

I have two questions; actually, I know the year forecast was revised from $450 million to $430 million. The $450 million was the estimate for the year based on the conference call that we had in the first quarter. And now, that figures is being taken down $20 million, I guess the question is, what happens lets assure that currency had any meaningful change in the last quarter to reflect the decline of $20 million. And my second question is, what kind of a forecast do we have for 2017 from China Automotive? Thank you.

[Dixon Chen:]

Okay, got it. Thank you. [Foreign Language – Chinese] So, to answer your first question, the decline for the first quarter results at the time when we reported first quarter results, the exchange rate, US dollars to RMB is about 6.4. But when we’re reporting the second quarter, the exchange rate during the second quarter is 6.7. So, it’s a quite significant change in a short period of time and we also anticipate the exchange is the currency – well, the Chinese currency will continue to weaken towards the end of the second half of the year. It is actually the reason we decided to take down the guidance as our – take place in China are reported in RMB. So the weakened RMB, weakening RMB put us into a disadvantage. [Foreign Language – Chinese] So, 2017 forecast, we normally will have it towards the end of this year, November or even December internal forecast. However, we can give you general guidelines as we only have made a five year plan. So, we are – according to the five year plan, 2017 should grow more than 10% from 2016.

[Robert Polivich:]

I have one other question and I was wondering EPS percentage for 2017 versus non-EPS systems, where do you see that going? I know it’s somewhere around 27.8% now. Where do you see that going in 2017?

[Dixon Chen:]

Okay. [Foreign Language – Chinese] So, basically, as you know we are the main supplier to the Chinese national brands, a lot of national domestic brands and if they can continue to grow in 2017, we will definitely benefit from that trend, we are looking at around 35% of our total sales will come from EPS sales. That being said, again, we are highly dependent on our customer, how well they position themselves and how well they sell their products and either way, we are definitely going to be – EPS, it’s going to account more than 28% to results we have now coming into 2017.

[Robert Polivich:]

I do have one more question as it relates to margins, do you think margins have bottomed out at this point? The trends have been good over the last year and with the mix changing more towards EPS conventional steering systems, is that price pretty stable at this point?

[Dixon Chen:]

[Foreign Language – Chinese] So, 18% gross margin we believe it’s pretty much – but, again, we are seeing a few areas of improvement. First, our new facility in Wuhan is now in trial production stage. In 2017 we will begin mass production and that facility is mostly produce electronic components for EPS, the electronic products for our EPS products. So that will help us. [Foreign Language – Chinese] The second area we believe is going to contribute to our gross margin improvement is next year our production will run to the full production cycle for Ford and Fiat. And especially for Fiat, we believe it’s going to – we are going to benefit from the business from Fiat in terms of gross margins.

[Robert Polivich:]

Okay.

[Dixon Chen:]

So, these are the two main areas we believe is going to help to improve our gross margins.

[Robert Polivich:]

Okay. I appreciate you answering the questions. Thank you.

[Dixon Chen:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] It appears we have no additional questions at this time. I’d like to pass the floor back over to Dixon for any additional concluding comments.

[Dixon Chen:]

Thank you, thank you everybody for attending China Automotive Systems 2016 second quarter earnings conference call. We look forward to speaking with you. You have a good day. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.